Finance executives have struggled against a tide of rising costs in the past year, paying more for everything from the commodities embedded in their products to the milk that swirls in their morning coffee. Service costs have also skyrocketed, perhaps nowhere more than in the legal arena.
With fees for some top New York City partners hitting the once-unimaginable $1,000-per-hour mark, and first-year associate salaries at one white-shoe Washington, D.C., firm reaching $180,000 a year, legal costs have risen at a pace that might make an OPEC minister blush. A recent study of 800 in-house lawyers conducted by the Corporate Executive Board found that their companies spent 50 percent more on large outside law firms last year than they did five years ago. In the current economic environment, with CFOs looking to rein in costs wherever they can, legal bills might as well be wearing a bull’s-eye.
Cutting back on legal spending is easier said than done, however, given that corporate litigation shows no signs of abating. Forty-five percent of U.S. companies spend $1 million or more on litigation annually, according to a study by law firm Fulbright & Jaworski. Amid the current crisis, many businesses expect to face even more lawsuits — some arising from bankruptcy disputes and labor claims following layoffs. The Fulbright survey found that 34 percent of U.S. in-house counsel anticipate more legal disputes in 2009, while just 8 percent forecast a decline.
Finance chiefs and their colleagues in the general counsel’s office are trying various approaches to contain legal costs. For one, company executives have become more selective about what kind of work they send to outside firms. “Our corporate counsel will spend a lot of time on an issue reviewing it themselves, and if they’re not certain, they will then bounce it to outside counsel, as opposed to immediately turning outside,” says Steve Crane, CFO at ModusLink Global Solutions, a supply-chain process-management company with a staff of three in-house attorneys. “As time moves on, I think we’ll be even more judicious about turning to outside counsel.”
ModusLink is not alone — many other companies are beefing up their in-house legal staffs in hopes of handling more work on their own. Susan Jacobsen, a spokesperson for the Association of Corporate Counsel (ACC), whose membership comprises 24,000 in-house lawyers worldwide, says the group’s most recent annual survey found numerous signs that the steady march of hourly rate increases is prompting companies to keep more work in-house. Median outside legal spending declined in the past year, the ratio of outside legal spending to in-house spending is down, and in-house attorneys don’t expect to increase their spending on outside counsel in the coming year, although they do anticipate further fee hikes.
In addition to doing more legal work on their own, company executives are discovering a new appreciation for small and midsize law firms, which generally charge less than their heavyweight competitors do.
Jim Grady, finance chief at A.L.P. Lighting Components, a midsize global manufacturer, says he has kept a lid on legal costs by sticking with a regional firm even as the business has doubled in size. “We don’t want to sacrifice our history with our law firm to go to another firm. They understand our objectives and the way we do things, and that allows them to be more efficient,” says Grady.